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Simon Bond
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About Simon Bond

Simon is 48 years of age and has been in the investment world almost all his life.

His father Bruce Bond was a pioneer in the world of personal financial advice and appeared as a regular in a large number of publications and the electronic media over a number of decades. His success and following gave rise to many of the financial journalists that are now heard around the nation on so many different programs and various formats.

Bruce was a trusted and respected member of the investment community and Simon has followed in his father’s footsteps.

Simon is a Partner at the Newport Office of Morgans Australia, after having spent almost two decades learning his trade in the heart of stockbroking in Melbourne's Collins Street at various firms.

He relocated his family back to Sydney for family reasons around five years ago, coming almost full circle, having begun his career in the 70s as a “chalkie” at the Sydney Stock Exchange

Simon is fanatical about the way that technology and the internet is altering the investment landscape around the globe and focuses much of his outlook on how these profound changes will affect the outcomes and futures of investors everywhere.

On the road to war?

Monday, August 28, 2017

By Simon Bond

This is the biggest player in the history of the world.” So stated Lee Kuan Yew to Graham Allison, Director of Harvard Kennedy School’s Belfer Center for Science and International Affairs.


 
Graham Allison has written a deeply-insightful book entitled Destined for War: Can America and China Escape Thucydides’s Trap? Thucydides showed how “it was the rise of Athens and the fear that this installed in Sparta that made war inevitable.” Henry Kissinger is quoted on the dust-jacket of the book as follows: “I can only hope that the US-China relationship becomes the fifth case to resolve itself peacefully, rather than the thirteenth to result in war.” Few Americans appreciate how fast and far China has advanced.


 
We quote as follows: In my national security course at Harvard, my lecture on China begins with a quiz. The first question asks students to compare China and the United States in 1980 with their current rankings. Repeatedly, students are shocked at what they see. One glance at the chart with numbers from 2015 should explain why. In a single generation, a nation that did not appear on any of the international league tables has vaulted into the top spot.


 
In 1980, China’s gross domestic product (GDP) was less than $300 billion; by 2015, it was $11 trillion making it the world’s second-largest economy by market exchange rates. In 1980, China’s trade with the outside world amounted to less than $40 billion; by 2015, it had increased one hundredfold, to $4 trillion. For every two-year period since 2008, the increment of growth in China’s GDP has been larger than the entire economy of India. Even at its lowest growth rate in 2015, China’s economy created a Greece every sixteen weeks and an Israel every twenty-five weeks. During its own remarkable progress between 1860 and 1913, when the United States shocked European capitals by surpassing Great Britain to become the world’s largest economy, America’s annual growth averaged 4 percent.


 
China's "One Belt One Road" strategy continues to enlarge by the day. 



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Since 1980, China’s economy has grown at 10 percent a year. According to the Rule of 72—divide 72 by the annual growth rate to determine when an economy or investment will double the Chinese economy has doubled every seven years. Most students are stunned to learn that on most indicators, China has already surpassed the United States. As the largest producer of ships, steel, aluminum, furniture, clothing, textiles, cell phones, and computers, China has become the manufacturing powerhouse of the world. Students are even more surprised to discover that China has also become the world’s largest consumer of most products. America was the birthplace of the automobile, but China is now both the largest automaker and the largest auto market.


 
Chinese consumers bought twenty million cars in 2015, three million more than were sold in the U.S. China also has the world’s largest number of Internet users. China imported more oil, consumed more energy, and installed more solar power than any other nation. Perhaps most devastatingly for America’s self conception, in 2016 as it has since the 2008 worldwide financial crisis. China continued to serve as the primary engine of global economic growth.

Lee Kuan Yew saw the [balance of power] as a fundamental building block in understanding relations among nations. But, he explained, “in the old concept, balance of power meant largely military power. In today’s terms, it is a combination of economic and military, and I think the economic outweighs the military.”


 
China primarily conducts foreign policy through economics because, to put it bluntly, it can. It is currently the largest trading partner for over 130 countries including all the major Asian economies. Its trade with members of the Association of Southeast Asian Nations accounted for 15 percent of ASEAN’s total trade in 2015, while the US accounted for only 9 percent.


 
This imbalance will accelerate in the absence of the Trans-Pacific Partnership as China moves quickly to establish its own equivalent in an emerging co-prosperity area. “History,” Kissinger observed in his first book, “is the memory of states.” This memory bears heavily on future national decisions. Both the American and Chinese militaries acknowledge that the US has lost, or at least failed to win, four of the five major wars it has entered since World War II. (Korea was at best a draw, Vietnam a loss, and Iraq and Afghanistan unlikely to turn out well. Only President George H. W. Bush’s war in 1991 to force Saddam Hussein’s Iraq to retreat from Kuwait counts as a clear win.) Reflecting on that record, former secretary of defense Robert Gates stated the obvious: “In my opinion, any future defense secretary who advises the president to again send a big American land army into Asia or into the Middle East or Africa should ‘have his head examined,’ as General MacArthur so delicately put it.”


 
In recent decades, Americans and the policymakers sending American troops to war have also displayed an ever-lower tolerance for losing American lives in combat. The impact of this casualty aversion is severe: military planners now rule out entire categories of operations because of their risk to soldiers, while politicians speak less and less of victory and more and more of protecting troops.


 
The timing of the elevation of US Cyber Security to the same level of Strategic Command is by no means a coincidence.

 

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The everything store

Monday, July 03, 2017

By Simon Bond

The Amazons, Googles and Facebooks of the world remind me so much of some historical monopolies that ended up being broken up by the Government of the day who saw them as companies that had simply amassed too much power. The irony of this is that following the forced breakups, the sum of the parts ended up being greater than the original.

The best illustration that I can think of is The Standard Oil Trust which was formed in 1863 by John D. Rockefeller. He built up the company through 1868 to become the largest oil refinery firm in the world. In 1870, the company was renamed Standard Oil Company, after which Rockefeller decided to buy up all the other competition and form them into one large company.

The company faced legal issues in 1890 following passage of the Sherman Antitrust Act. That also brought unwanted attention to the company by Ida M. Tarbell, a McClure's Magazine reporter, who began an investigation. Following publication of her report, the Standard Oil Company was forced to break up into separate state companies the "Seven Sisters" each with its own board of directors.

The Standard Oil Trust had quickly become an industrial monster. The trust had established a strong foothold in the U.S. and other countries in the transportation, production, refining, and marketing of petroleum products. Early on, Rockefeller and partners attempted to make money on the home lighting market, converting whale oil to kerosene. Gasoline had been nearly worthless up to 1911. However, with a growing demand for "juice" needed to power the newly emergent automobile, Standard Oil Trust's moneybags began to bulge. 

The Trust broke up in 1911, which led to the skyrocketing of the trust's stock prices. Some historians contend that the breakup of Standard Oil closely resembles the more modern monopoly breakup of AT&T and the Bell telephone system. 

Like the telephone industry’s "Baby Bells," many of big oil’s "Baby Standards" kept the old company name as they went into business for themselves. However, if a company separated on its own, it was restricted from using the "Standard" brand. Just as Bell had accomplished later on in its history, the Standards soon rose up to dominate the market, becoming more valuable than the original trust.

The impending arrival of Amazon to Australian shores has sent the retail market into a frenzy. Tens of millions of dollars of market capitalisation has been erased from the listed Australian retail sector, just on the back of the (free), fear mongering, thanks to the generous Australian media who are saving the company millions in advertising costs and publicity, that’s even before Amazon has stepped ashore here.

Just ask Gerry Harvey how he feels about Amazon and it’s impending arrival. Perhaps top of the 'probably shouldn't say that' list was a suggestion that Australia stop Amazon from coming here "like Donald Trump not letting the Muslims in". Later he would refer to Amazon as "parasites".

Harvey's issue focuses on Amazon's pricing, which he believes is part of a long-term plan to "send everyone broke, then put up the price." Among Harvey's more reasonable concerns: the fact that Amazon, and global companies like Amazon, aren't paying corporate tax in Australia. “They pay virtually no company tax [globally] and make virtually no profit in relation to their turnover. They’re not good corporate citizens, they send lots of people broke, they contribute virtually nothing to society. They’re not someone that we’d want around the place”, thundered My Harvey.

Having such market power means never having to say you’re sorry -- even to your owners. Beyond taxpayer subsidies, Bezos can afford to be a voracious predator because his Wall Street investors have allowed him to keep operating without returning a profit. On paper, his revenue-generating machine has lost billions of dollars, yet his major investors, enamoured with Amazon’s takeover of one consumer market after another, haven’t pulled the plug. Amazon uses their capital to buy its competitors and/or to market its own version of competitors’ products, which it then sells at a loss in order to squeeze hapless competitors out of business. To many that’s the very definition of predatory pricing.

Brad Stone’s book about Amazon gives a chilling example of one such predation. According to the author, Amazon has its own corporate espionage team called Competitive Intelligence that tracks rivals. In 2009, CIAmazon spotted a fast-rising online seller of one particular baby product: Diapers.com. A Bezos lieutenant was dispatched to inform the diaper honchos that the cheetah was going into that business, so they should just sell their firm to it. No thanks, replied the upstart.

Amazon promptly responded to the rebuff by marketing another line of diapers with a price discount of 30%. It kept dropping the price even lower (plus free shipping) when the smaller firm tried to fight back. Diapers.com’s investors grew antsy, and in September 2010, the two founders of the company met with Bezos himself and surrendered. The final blow was their discovery that Bezos, in his campaign to crush them and control the market of online diaper sales, was on track to lose $100 million in just three months.

Fast forward to where we now sit with the behemoths. Stratechery.com writes about “Aggregation Theory” which is about how business works in a world with zero distribution costs and zero transaction costs; consumers are attracted to an aggregator through the delivery of a superior experience, which attracts modular suppliers, which improves the experience and thus attracts more consumers, and thus more suppliers in the aforementioned virtuous cycle. It is a phenomenon seen across industries including search (Google and web pages), feeds (Facebook and content), shopping (Amazon and retail goods), video (Netflix/YouTube and content creators), transportation (Uber/Didi and drivers), and lodging (Airbnb and rooms, Booking/Expedia and hotels).

The first key antitrust implication of Aggregation Theory is that, thanks to these virtuous cycles, the big get bigger; indeed, all things being equal, the equilibrium state in a market covered by Aggregation Theory is monopoly: one aggregator that has captured all of the consumers and all of the suppliers. This monopoly, though, is a lot different than the monopolies of yesteryear: aggregators aren’t limiting consumer choice by controlling supply (like oil) or distribution (like railroads) or infrastructure (like telephone wires); rather, consumers are self-selecting onto the Aggregator’s platform because it’s a better experience.

It’s my long-held view that in time the new Standard Oils, aka the Internet guys, will incur the wrath of Governments globally and will also be broken up. 

And then, yet again, the sum of the parts will be worth more than the whole. 

My view of Amazon and Jeff Bezos is complete awe. In my mind he is the businessman of our generation, but gee these guys really do scare me. So, as Andy Grove of Intel continually said, “Only the paranoid survive”.

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The new world order

Monday, May 29, 2017

By Simon Bond

Not a day goes by when there is not some "left field event" that roils markets. News is now instant and constant via social media, and an attack in the UK for example, is news globally within seconds. The traditional news networks now chase the netizens for information, images and footage.

How the world has changed. In April 2007, the world's largest company was Exxon Mobil. Gazprom, Royal Dutch Shell and BP were also on the ticket. Fast forward a decade and those guys are gone, to be replaced by Apple, Google, Amazon, Facebook and Co. In another decade, the list will probably be populated by companies we have not yet considered. So whats next? Below, I have encapsulated my view of the future. In a nutshell, the network always wins. In the future, companies might not even have a "marketing" department. It may come with a new title, the "networking" department. 

The new world order

The network always wins

What is happening in front of our eyes is that everything is becoming connected to everything else. Information is flowing through networks with greater intensity, and that completely changes everything. Markets are disappearing, becoming networks of information with the customer at their heart.

And if the outside world becomes a network, companies will have to follow suit. 

Volatility comes from the Latin verb volare, which means “to fly.” It basically means that things tend to vary often and widely. In today’s world, things are changing faster and faster, and stability often seems unattainable. After the financial crisis and the economic turmoil of the past few years, many people have been wondering, “When will things get back to being stable again?” 

The answer could be never. 

Perhaps we’re living in times of greater and greater instability, more and more turbulence, and increasing volatility. Stability is flying away.

Many of us grew up trying to build a world based on security, things that we could count on, bank on, and build on. Now, more and more, we seem to be surrounded by uncertainties. We’re uncertain about where the economy is heading. We’re uncertain about where technology is heading. We’re uncertain about whether our companies will survive, how our customers will react, and how our markets will evolve. 

We seem to be heading toward a world in which we have more uncertainties than certainties to deal with.

The result is that in the world of today, business strategies have become more fluid. The traditional five-year plan makes no sense to companies whose world is changing faster and faster. What use is a five-year strategy for the newspaper industry, which is watching its markets disappear at the hands of Twitter and Craigslist? 

What use is a five-year strategy for the television industry, which is seeing its markets flip completely because of YouTube, Netflix, and Hulu? The reality is that companies now update their strategies more frequently than ever before. They have to, if they want to survive. I heard one CEO say, “We still have a five-year strategy. Actually I have a new one every three months.” 

This is the era of “fluid strategy,” and it means that companies have to act more quickly and be more agile than ever before.

Thanks to the new normal effects of digitisation, we’ve started to build a society that is entirely based on the concept of networks. We have networks of information, networks of knowledge, networks of entertainment, networks of friends, and networks of enterprises. 

Everything we see around us is based on the concept of networks.

What we’re beginning to see appear in society, business, and our social lives is that the world is completely defined by networks.

Facebook, for example, was founded on the idea that while there’s value in discrete information about people (their names, what they do, etc.), there’s even more value in the relationships between them.

Antonio Damasio, professor of Neuroscience at the University of Southern California said it beautifully: “Our emotions influence our thinking much more than our thinking influences our emotions.” 

In this era, companies must understand how to influence networks in order to influence individual consumers. 

Careers are mechanisms of advancement, and the concept of climbing ladders and structures has become rather meaningless in the age of networks. More and more people are focused on individual projects, not on one overarching path. People want to be able to sample new insights and try out fresh approaches. They want to keep their options open and be able to change direction. 

Old-style serial résumés, which depict one job after another, are on the way out. Today, more and more people are embarking on parallel paths, with multiple interests and simultaneous projects. 

When the laws of network behaviour overturn our understanding of market dynamics, we will see that the companies that survive will be those that have understood the need to drastically rethink their organisational fabric.

So there, thats my view.

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Straight Up

Monday, May 08, 2017

By Simon Bond

Last week, we wrote to you to point out the situation with US-based Millimetre Wave Spectrum business Straight Path.

Excerpted below is a part of the note sent regarding what was transpiring regarding Straight Path Inc, listed in the US.

What is it? And why should you care? Well, you should take note of recent developments in the United States regarding the 5G strategies of the major telcos, where they see the future, and what will be able to be achieved. A couple of weeks ago, a little-known listed company in the US called Straight Path Communications Inc were trading around $35.00, until AT&T, not an unknown telco in the US, launched a bid for the company, (which incidentally holds a large trove of 28 GHz and 39 GHz millimeter wave spectrum used in mobile communications, and would give a new owner an advantage in 5G development).

The bid price was $95.63 which represented about a 170% premium above the price at the time, one would have thought a knock out bid. Well not so fast, now another bidder has emerged, rumoured to be Verizon with a bid of $104.64. AT&T are not yet out of the race and are currently considering their position.

And now this; shares in Straight Path Communications (STRP) soared on Wednesday last week, as a bidding war heated up for the wireless company between AT&T (T) and another major telecom player, believed to be Dow component Verizon Communications (VZ).

Straight Path stocks jumped on word that the company received a $2.3 billion offer from an unidentified "multinational telecommunications company" — an offer that it called a "superior proposal." Straight Path said in a statement that the unnamed company had revised its offer to $135.96 per share, up from $104.64 per share.

The bidding for Straight Path began on April 10, when AT&T agreed to pay $95.63 per share, a near 160% premium over Straight Path's closing price of $36.48 on April 7.

Straight Path is a key acquisition target, as the company controls a spectrum-rich bandwidth of wireless licenses that are inviting to telecom providers. Straight Path owns high-frequency airwaves in what is known as the 28-gigahertz and 39-gigahertz millimeter wave band, that can be used for 5G wireless services.

Both AT&T and Verizon plan to deploy 5G wireless services, which are expected to include high-speed broadband to residential homes as well as connections to self-driving cars, drones, and other web-connected devices, generally called the "Internet of Things."

And the best placed Australian listed company to be a part of all of this is, in my opinion, Superloop Ltd.

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Leading the horse: Superloop

Monday, May 01, 2017

By Simon Bond

As they say, you can lead a horse to water.

When Superloop (SLC) acquired Big Air in late 2016, many market participants were curious as to how the business would fit in with one that was predominantly about building fibre in Singapore and Hong Kong.

At the time, Bevan Slattery, CEO of Superloop said, "The acquisition of BigAir will allow us to leverage our fibre network plus provide us with new wireless capabilities to deliver low cost gigabit connectivity".

The company stated at the time that BigAir is a strong strategic fit with Superloop, they noted;

  • The Proposed Acquisition fundamentally enhanced opportunities for Superloop’s fibre business, allowing Superloop to accelerate the rollout of fibre across Australia.
  • Superloop will hyper-scale BigAir’s wireless and “fibre extender” capability, and by leveraging Superloop and it's fibre network, Superloop will build a low-cost access alternative for Gigabit+ speeds.

Well, fast forward not even 6 months, and how the telco landscape has changed, the earth really has moved. Vocus and TPG have seen their share prices decimated, Telstra has felt the burn of the blowtorch as TPG announced it's entrance into the mobile market, so if you have been an investor in this space, it's not made for happy times.

But, for the keen observer of the sector, the changes underway have given cause for an optimistic view of Superloop. Mr Slattery was interviewed by many industry publications and also the mainstream financial press. In these interviews he kept referring to "millimetre wave technology". 

What is it? And why should you care? Well you should take note of recent developments in the United States regarding the 5G strategies of the major telcos, where they see the future, and what will be able to be achieved. A couple of weeks ago, a little known listed company in the US called Straight Path Communications Inc were trading around $35.00, until AT and T, not an unknown telco in the US, launched a bid for the company, (which incidentally holds a large trove of 28 GHz and 39 GHz millimeter wave spectrum used in mobile communications, and would give a new owner an advantage in 5G development).

The bid price was $95.63 which represented about a 170% premium above the price at the time, one would have thought a knock-out bid. Well not so fast, now another bidder has emerged, rumoured to be Verizon with a bid of $104.64. AT and T are not yet out of the race and are currently considering their position.

Wireless firms are eyeing high-frequency bands for broadband services to homes as well as new apps, such as drones and self-driving cars. In the 39 GHz band, Straight Path owns spectrum in the 40 largest markets across the U.S., including New York City, Los Angeles, San Francisco, Atlanta and Washington, D.C.

Wireless companies want next-generation gadgets to download at rates of gigabits per second. The question is how to make it happen. So again, you may ask yourself the question, why should I care? Well it's worthwhile taking a few minutes to look at Millimetre wave technology and the spectrum it uses and what can be achieved. Please see below some excerpts from an interview I read a while back.

The details of 5G are a long way from being decided but it is expected to provide Internet connections 40 times faster and with at least four times more coverage worldwide than the current 4G Long Term Evolution (LTE) wireless communications standard. Even without a clear definition of 5G, testing is underway or in the works in places including Finland, Russia and South Korea.

One of the most promising potential 5G technologies under consideration is the use of high-frequency signals—in the millimeter-wave frequency band—that could allocate more bandwidth to deliver faster, higher-quality video and multimedia content. Other lines of research seek to enable a single mobile device to simultaneously connect to multiple wireless networks to boost connectivity and speed.

Mustafa Cenk Gursoy, an Associate Professor in Syracuse University’s College of Engineering and Computer Science, and researchers at The Ohio State University study ways to more efficiently access the radio spectrum. Scientific American spoke with Gursoy about the need for 5G and the role that millimeter-wave frequencies, in particular, could play. [An edited transcript of the interview follows.]

Why do we need a new wireless standard?

The motivation behind a new standard is the exponential growth in wireless. We’re talking about billions of users, billions of devices and billions of connections. That’s something that a new standard has to address, because 4G is not going to be efficient enough to handle this much growth, much of it due to mobile video traffic. Smartphones, tablets, social networking sites and video-sharing sites have helped mobile video traffic become more than half of all mobile traffic.

On top of this, people have really high expectations for wireless services. They want a high level of reliability, low levels of latency [delayed uploading or downloading of content] and constant connectivity—anytime, anywhere. The Internet of Things, where new types of devices are connected digitally, as well as the increasing use of mobile technology for health care, smart power grid and vehicular networking create new expectations for wireless, especially when it comes to speed and reliability.

Any move to 5G wireless technology is still years away. What should we know about the standard at this point?

There’s been an increase in interest in 5G within the past year, particularly from the research community. And telecom companies in the U.S., Europe, South Korea, China and Japan are interested in designing, testing and implementing these kinds of systems, so there’s definitely some momentum building. It’s not definite what 5G will be but people are talking about candidate technologies and what needs to be addressed in this next-generation wireless standard. And it might not be that far away—some companies are thinking they will have 5G systems up and running by 2020. That’s not really a lot of time.

How will 5G differ from 4G?

One difference will be that 5G may move wireless signals to a higher frequency band, operating at millimeter-length wavelengths between 30 and 300 gigahertz (GHz) on the radio spectrum. That’s going to open up a huge amount of bandwidth and alleviate concerns about wireless traffic congestion. Radar, satellite and some military systems use this area of the spectrum currently but it’s definitely less occupied than the spectrum currently in use. In addition, whereas 4G supports hundreds of megabits-per-second data rates, 5G is promising data rates in the gigabits-per-second range. It may not support those higher rates at all times in all places, but it will lower latency rates overall.

Are there drawbacks to wireless devices operating at such high frequencies?

Generally, as you move to higher frequencies, transmission range gets shorter—hundreds of meters rather than kilometers. And signals are unable to penetrate walls easily. Some hardware components, such as analog-to-digital converters, might also be expensive. We are still learning about millimeter wave and are testing its capabilities. Another challenge is if the transmitter and the receiver don’t have a line-of-site connection, there is a lot of attenuation [loss] in the signal. We’re conducting performance analyses to better understand the communication reliability and plan to publish a paper in the fall at the IEEE Vehicular Technology Conference in Boston.

What can be done to overcome these limitations?

There has been a trend toward small cells [portable base stations often called microcells, femtocells or picocells, depending on their ranges]. Millimeter waves can take advantage of these technologies, as they are better suited for transmission over relatively short ranges. High-frequency signals can also be reused across short distances by different cells in a network, meaning the available spectrum is used more efficiently. In addition, antenna size is inversely proportional to frequency size, so higher-frequency signals would require smaller antennas. You could pack more antennas into devices. That enables directional transmissions—you could actually steer the signal in a particular direction. This could overcome the loss of some of the signal transmission strength. More than one antenna operating in the same frequency range can also send multiple streams of data, increasing the data rate.

What research are you and your colleagues doing in the area of millimeter waves?

This first year we are learning the characteristics of communication in the millimeter range of frequencies and doing some performance analyses of millimeter-wave networks. For a short range, with devices in fixed positions, millimeter waves can connect devices to a network. The challenge is delivering this service to a user who is walking or driving. I also want to see networking scenarios where you can actually support multimedia traffic in a mobile environment using millimeter wave.

How does millimeter wave improve energy efficiency?

The use of directional transmission between the base station and a mobile device reduces signal interference, and that might account for the reduction in energy use we’re seeing. When you establish a direct link and suppress interference, you can send data at higher rates for a given transmission energy level. Therefore, throughput per unit energy increases and hence energy efficiency improves. In such an analysis, it is also important to take into account possible increases in hardware energy consumption due to operation at high frequencies. Energy efficiency is very important here as well because of the growth in the number of users and devices—and efficiency should be considered with any new standard.

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How can Telstra unlock value and reassure shareholders?

Monday, April 10, 2017

By Simon Bond

The share price of Telstra has been on a gradual decline since the day David Thodey announced his departure as CEO of the business - it's all in the timing they say.

Telstra shares are a significant holding in most portfolios, and they are seen as a stable income producer for yield-oriented investors, but the decline in capital value over the past year and more has many investors becoming increasingly nervous.

So how does a business like Telstra unlock value and reassure its shareholders about its future? The past few years have also seen the value of Telstra's property portfolio scaling new heights, so the question again comes back to how the business unlocks value for its stakeholders.

Considering the developments in Data Centre technology, the build out of the NBN, and the huge increase in "mobile" over the past five years, one can only wonder what the business will look like five years from now.

Back in April 2011, we published a note discussing exactly this strategy, so maybe it's now time for the company to consider the strategy we put forward six years ago. The note is republished below. 

"I am surprised that Telstra has not been in receipt of a strategy to unlock the value in these assets by someone such as Macquarie, or a private equity player.

The exchanges all around Australia could also be used as data centres, as they are all already connected by fibre. Some exchanges may become redundant as technology moves forward and the prime locations of where the exchanges are located would have many a property developer salivating at the prospects of redevelopment.

According to recent Telstra records that I located, there are 1,043 Telstra telephone exchanges in Sydney, 1,095 in Melbourne, 605 in Brisbane, 369 in Perth, 252 in Adelaide and 95 in Hobart.

Many of these exchanges could be converted to cloud-based computing operations and data centres offering hardware and software to access web-based applications. The IP infrastructure used by companies such as Telstra is better suited to cloud services.

By way of illustration as to where some of these exchanges are located, please see below.

Melbourne snapshot:

Brighton 9

South Yarra 15

Sandringham 8

Mount Eliza 5

Kew 7

Hawthorn 8

Sydney snapshot:

Mosman 4

Cremorne 15

Hunters Hill 6

Paddington 11

Waverley 12

Manly 8

Across Australia, there are thousands of other well-positioned Telstra exchanges that may be fit well for future requirements, in fact, the total number that I identified was 6,353. 

Both the Government and Telstra realise that cloud computing is redefining traditional IT. 

The growth in the cloud is still very much underestimated and a recent study by Forrester Research puts more meat on the bone.

When everything runs inside an Internet Browser cloud based email, accounting and customer tracking systems enable companies to reduce complexity and maintenance costs, think Webjet, Real Estate.com, Wotif, Car Sales.com, Reckon, RP Data and Seek to name a few. 

In general, cloud computing customers do not own the physical infrastructure, instead avoiding capital expenditure by renting usage from a third-party provider. They consume resource as a service and pay only for resources that they use. 

Many cloud-computing offerings employ the utility computing model, which is analogous to how traditional utility services (such as electricity) are consumed, whereas others bill on a subscription basis. Sharing "perishable and intangible" computing power among multiple tenants can improve utilisation rates, as servers are not unnecessarily left idle (which can reduce costs significantly while increasing the speed of application development). 

A side effect of this approach is that overall computer usage rises dramatically, as customers do not have to engineer for peak load limits. In addition, "increased high-speed bandwidth" makes it possible to receive the same response times from centralised infrastructure at other sites. 

Cloud computing users can avoid capital expenditure (CapEx) on hardware, software, and services when they pay a provider only for what they use. Consumption is usually billed on a utility (resources consumed, like electricity) or subscription (time-based, like a newspaper) basis with little or no upfront cost. Other benefits of this time sharing-style approach are low barriers to entry, shared infrastructure and costs, low management overhead, and immediate access to a broad range of applications. In general, users can terminate the contract at any time (thereby avoiding return on investment risk and uncertainty), and the services are often covered by service level agreements (SLAs) with financial penalties.

According to Nicholas Carr, the strategic importance of information technology is diminishing as it becomes standardised and less expensive. He argues that the cloud computing paradigm shift is similar to the displacement of electricity generators by electricity grids early in the 20th century.

Other factors impacting the scale of any potential cost savings include the efficiency of a company’s data center as compared to the cloud vendor’s, the company's existing operating costs, the level of adoption of cloud computing, and the type of functionality being hosted in the cloud.

In the future, cloud capacity can be rented as required, providing near infinite scalability giving firms the option to outsource either all or part of their IT Infrastructure and will do for modern day business what the electric grid did for the early industrial age when companies no longer had to invest in expensive electric generators and were able to instantly scale their power usage to meet product demand through a simple power line hookup to the local utility.

Until now, the telecom related companies have been absent from cloud computing, however cloud computing offers significant potential for telecom service providers by combining their competitive advantage as network operators with technological innovation. 

Cloud services can increase the value of carrier networks in multiple ways and create new revenue streams. At a minimum, cloud services can significantly increase network traffic and network utilisation as Telecom operators can charge both end users and cloud-based providers for a given level of e-service quality.

Cloud computing lowers barriers to entry, accelerates innovation and intensifies competition and will ultimately lead to massive consolidation as the telecom and networking sectors converge."

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What’s it worth?

Monday, March 27, 2017

By Simon Bond

Ever since Michael Dell and his partners started quietly acquiring small independent TV stations in the US for a “song” I have been watching how this story unfolds. He’s not alone as Private Equity Firms in the US have been scouring the country for TV stations as well. It’s not been unusual for folks in small US country towns to see a raft of well dressed players rolling into town looking to “tune in”. 

Why would a billionaire buy a TV station in Pittsburgh that airs only a local Catholic daily Mass and old Roseanne reruns? How could a collective investment of $80 million dollars potentially reap up to $4 billion dollars? 

Well it’s all in the spectrum. That spectrum is becoming more and more valuable every day for the telephone companies and less and less valuable for the TV Networks it seems. In the US TV stations who hold rights to spectrum will be in the position to put this spectrum up for auction, and the buyers will be the likes of Verizon, Sprint and T Mobile in order to enhance their own wireless networks. 

The spectrum is becoming more and more valuable due to the insatiable demands of the consumer for video and broadband services, and it lays the groundwork for the upcoming 5G networks, which will usher in a whole new world of services, applications, and as they say “the Internet of things”. 

As TV broadcasters go, KSCI Channel 18 in Long Beach is a little fish in a big pond. The independent station, which airs local shows in Chinese, Korean and Tagalog as well as other Asian-language programs, was in bankruptcy in 2012 when Texas-based NRJ TV bought it and two small stations for a reported $45 million. NRJ TV purchased KSKT Channel 36 in San Marcos in northern San Diego County for $9.8 million from Blue Skies Broadcasting. The FCC's opening bid is $142 million for the airwaves of the station, which broadcasts local programming. KSCI's slice of the nation's second largest market could be a precious catch as well and may be worth as much as $585 million to telecommunications companies, according to opening bids released by the Federal Communications Commission. 

As more people access the Internet wirelessly, demand for airwaves has increased. An FCC spectrum auction that ended in early 2015 brought in a record $44.9 billion. 

Broadcast airwaves are the highest quality, able to carry signals deep into buildings and over long distances. The Congressional Budget Office has estimated the auction could raise as much as $40 billion for the federal government after payments are made to broadcasters. 

In simplistic terms if the case were the same in Australia it would make sense for say the Nine Network to buy the Ten Network. The Internet has changed the game of delivery as everyone knows and the market capitalisation of TEN is $210 million dollars. The broadcasting licence it seems is in the books at a value of $350 million dollars. 

Give the license back to the Federal Government and they then get to sell the spectrum to say Telstra, TPG, Optus or anyone else who can make a go of it.  

The spectrum would appear to be worth a lot more to the new types of telcos than it’s worth to an old TV network. 

Maybe the larger and more recent shareholders in the Ten Network have formed a similar view. But then again who knows? 

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What lies ahead

Monday, February 20, 2017

By Simon Bond

We continually pound the page about what is heading our way, and as always, one of our key objectives is to understand the trajectory of disruptive technologies, and how to leverage them via investing.

Over the next five years, multiple exponential technologies will converge to disrupt virtually every aspect of the global economy. This is crystal clear.

Follow the people who have the ability to look over the horizon and understand the scale of disruption that lies ahead.

Rapid advances across a broad range of sectors during the last year characterise the scale of change, and it's only just begun.

At the top of the list is communications via the connection of eight billion plus people, through high-speed 100MB broadband networks via undersea cable, drones and satellites and that infrastructure building is currently underway.

As more of the world comes online, commerce and economies will continually come alive, new technologies will assist in ease of communications and connectivity will lift many economic boats in the poorer nations.

There are so many smart people in places where network connectivity will allow them to make an impact. Below are the projected GDP ranking changes predicted between now and 2050.

Increased connectivity combined with the excellent demographic profiles of the emerging countries will be a game changer.

 

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Got beer? The world's best beer growth market

Monday, February 13, 2017

By Simon Bond

Since it's been a bit warm over the past few weeks, I thought I better take a look at Australia's general beer consumption habits, and that of our neighbours.

I really did it to figure out where the best growth market in the world for beer is, since we are all getting hotter under the collar these days. Surprisingly to some (but not others) it seems Vietnam is the best market for beer growth. This explains why the larger beverage and beer companies are making a beeline for Vietnam considering the Government's upcoming selldown of their ownership in this sector. Hardly surprising that studies show Australia is the best beer market, but also the most expensive to shout a round.

Southeast Asia (SEA), with its high economic growth and low alcohol consumption compared to the developed world, coupled with a young population and emerging middle class, is a promising market for beer producers. International giants such as Heineken, Carlsberg, and Kirin are aggressively expanding in SEA by acquiring dominant domestic brands and each other, as Heineken bought the remaining stake in its subsidiary - Asia Pacific Breweries - from Fraser and Neave (F&N) in 2012. At the same time, prominent local players are also making deals: Thailand’s Boon Rawd is in a joint venture with Carlsberg, while Thai Beverage acquired F&N in 2013.

Vietnam is the largest market with the highest consumption level per capita as well as annual growth. Thailand, on the other hand, is the only country examined with negative annual growth rates in alcohol consumption at -2.4%. Thailand’s negative growth is mainly attributed to the political crisis that took place at the end of 2013 and efforts to reduce alcohol consumption by the government. The Philippines appears to be static, while Malaysia and Indonesia, both containing a large Muslim population, understandably have relatively low annual consumptions of beer per capita. Interestingly, however, both their annual growth rates in beer consumption are comparatively high. This reflects the increase in consumption by the non-Muslim population of both countries, as well the effectiveness of the beer companies’ aggressive advertising campaigns.

Myanmar's beer consumption in 2014 reached 210,000 kiloliters. Per-capita volume was a mere tenth or so that in Southeast Asian neighbours, Thailand and Vietnam. But with its economy growing rapidly, beer drinking is on the rise, mainly in cities. The market is expected to more than double from 2013 levels by 2018.

But, Vietnam still looks to be the standout investment opportunity due to their favourable demographic profile. 

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Brambles just got Amazon'd

Monday, January 30, 2017

Brambles "shock" profit downgrade recently, which saw 3.1 billion dollars wiped off the market capitalisation, "surprised" management. That's what is actually a surprise, and what it shows is that company executives and management need to study the big maps more than they are now, to understand the inevitable changes that are currently underway.

A recent front page of the Financial Review (below) emphasises that US retailers are sending back more pallets than they are receiving.

To put it simply Brambles just got Amazon'd. And it hasn't happened overnight as some of the charts below graphically display.

We continually write about the disrupters, the Amazon's, the Netflix's, the Uber's, the AirBnb's. The Internet has not only disrupted existing businesses it's blowing them to bits. Amazon has, and will continue to do what it does best. And that spells trouble for those who fail to grasp whats coming down the line.

Below is a chart of the market values of US retailers in 2006, and the corresponding values in 2016. A picture, or chart in this case is worth more than a thousand words. If the company that your invested in has a chance of being Amazon'd you should consider your position; because it's only just begun.

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